The first chapter of Alistair Darling’s July white paper on banking reform was devoted to explaining just how important the City is to the UK economy. The Treasury’s ledger of revenues from financial services did not include a debit column that listed the amount lost on institutional bailouts and tax avoidance – of course it didn’t. Put to one side, if you can, the watchdogs’ manifold failings in the run-up to the banking crisis. In the debate over reforming the City there has been none of the regulatory capture that economists usually fret about – where the regulators forget about the public interest, and rig the rules to suit the very sector they’re meant to be supervising. There is, however, plenty of evidence of political capture. This isn’t just a New Labour problem; it applies also to David Cameron and George Osborne, whose policies are nowhere near as tough as their rhetoric – and to Barack Obama’s administration, which, on everything from regulating bonuses to handing out taxpayer money, appears to have turned into an unglamorous subsidiary of Goldman Sachs. A cast like this means the prospects for real reform at next month’s G20 summit of major economies in Pittsburgh are depressingly slim.

I think that making the distinction, as Aditya does here, between “manifold failings” and “regulatory capture” is a very useful thing to do. A regulator who failed is not necessarily a captured regulator.

Aditya’s also right that the real problem here is that regulators are appointed by politicians, and it’s the politicians who are captured. The banks don’t need to capture their own regulators: all they need to do is capture the politicians who appoint them. If you’ve got Phil Gramm deciding who gets appointed, you’ve won your battle before it’s even fought.

This is one more reason why consolidating regulatory power in the central bank is a good idea: even if the central bank isn’t totally independent, it’s more independent than any other regulatory agency is ever going to be, and therefore less likely to become filled with political hacks. Say what you like about the Fed, you’re not going to see it demonstrate the kind of premeditated spinelessness that the SEC commissioners showed over most of the past 10 years. If we want effective regulation, we’re going to have to remove power from politicians, many if not most of whom receive enormous campaign donations from precisely the companies they would regulate.